HUD, Justice Department Agree to Ease Use of False Claims Act
John Jordan | October 2019
WASHINGTON—U.S. Housing and Urban Development Secretary Ben Carson and U.S. Attorney General William Barr issued a Memorandum of Understanding on Oct. 28 between the two agencies that sets what the two agencies say is “prudential guidance on the appropriate use of the False Claims Act for violations by Federal Housing Administration lenders.
“This agreement clearly outlines our FHA mortgage program requirements, so they do not impede or discourage lenders from offering affordable FHA-insured loans to credit-worthy borrowers,” said Secretary Carson. “In taking these steps, we are fulfilling an important element our Housing Finance Reform Plan and making clear to all responsible lenders that FHA’s mortgage program is a program they should participate in. At the same time, HUD will not tolerate irresponsible or fraudulent lenders who defraud borrowers and taxpayers.”
“This MOU sets forth a robust and collaborative process for deciding when to pursue False Claims Act cases to remedy material and knowing FHA violations,” said U.S. Attorney General P. Barr. “DOJ and HUD will work together to determine when HUD’s administrative remedies are sufficient, or other recourse is appropriate, to address harm to the borrower, the taxpayer, or the government. Importantly, this MOU is the product of the excellent working relationship that has developed between our two agencies in our shared pursuit of greater clarity and fairness.”
As the MOU makes clear, HUD expects that FHA requirements will be enforced primarily through HUD’s administrative proceedings, but the MOU specifically addresses how HUD and DOJ, including the U.S. Attorneys’ Offices, will consult with each other regarding use of the FCA in connection with defects on mortgage loans insured by FHA.
HUD will utilize the Mortgagee Review Board, which was created by statute and empowered to take certain actions for non-compliance by FHA lenders, to review and refer FCA claims. The MOU prescribes the standards for when HUD, through the MRB, may refer a matter to DOJ for pursuit of FCA claims, and also sets forth how DOJ and HUD will cooperate during the investigative, litigation, and settlement phases of FCA matters when DOJ receives a referral from a third party, such as in qui tam cases. The MOU also recognizes that application of the FCA requires, among other elements of proof, a material violation of HUD requirements, and DOJ attorneys will solicit HUD’s views to determine whether the elements of the FCA can be established.
The interagency understanding is intended to address concerns that uncertain and unanticipated FCA liability for regulatory defects led to many well-capitalized lenders, including many banks and credit unions statutorily required to help meet the credit needs of the communities in which they do business, to largely withdraw from FHA lending. This has dramatically shifted FHA’s lender base during the last decade.
Today, depository institutions originate less than 14% of FHA-insured mortgages, down significantly from approximately 45% in 2010. It is worth noting that for decades, FHA has been the hallmark product for the nation’s first time homebuyers. This important segment of the market currently constitutes more than 80% of FHAs loans. Additionally, a third of FHA loans are made to minority borrowers.
National Association of Realtors President John Smaby issued a statement in connection with the two agencies’ decision to ease the use of the False Claims Act.
“The National Association of Realtors commends HUD and the DOJ for the Memorandum of Understanding announced today that clarifies the departments will take the lead on False Claims Act reviews,” said Smaby, a second-generation Realtor® from Edina, MN. “NAR believes this change will help more consumers access low down payment loans and ensure a wide range of financial institutions will offer Federal Housing Administration-backed loans in the future, which is particularly important as new FHA condominium loan policies have created additional opportunities for potential homebuyers across the country.”
The MOU is part of a comprehensive plan to bring greater clarity to regulatory expectations within the FHA program, and fulfills a key component of the HUD Housing Finance Reform Plan. In addition to the MOU, FHA is simplifying the certifications that lenders make in connection with the FHA program. The certifications will better track statutory requirements and address materiality and culpability considerations.
FHA is also refining its defect taxonomy that it uses to assess the appropriate remedies for identified loan underwriting defects. Together, these new and revised components are intended to make affordable FHA-insured mortgages more accessible to qualified borrowers, reduce risks within the FHA program, and preserve appropriately tailored remedies.